Company overview
Ford Motor Company (NYSE:F) is involved in the development, manufacture, distribution, and service of vehicles, parts, and accessories. It operates in two areas: automobiles and financial services. The automobile sector offers vehicles under two brands, Ford and Lincoln. The financial sector provides automotive financing products, which include retail installment sale contracts for new and used vehicles, leases for new vehicles, etc.
Geographical spread
The company markets cars, trucks, parts, and accessories in different parts of the world through its retail dealers. North America is the biggest contributor to its revenue, followed by Europe.
Financial insight
Ford Motor Company (NYSE:F)’s revenue declined 1% in fiscal 2012. This was primarily due to the global economic slowdown to 2.5% growth in 2011 as compared to 4% in 2010. The Eurozone crisis also negatively impacted revenue growth. Amidst a slowdown and decline in revenue, the decline in EBITDA margin was marginal at 100 basis points for 2012.
In terms of cash-flow metrics, a positive operating cash flow and free cash flow enhance the liquidity position and also support the working capital requirements. High capital spending in fiscal 2012 and the first quarter of 2013 shows the company is aggressively improving the model mix and accelerating the development of new products, which the customers demand. High capital expenditures will translate into future revenue growth.
Overall, the fundamentals look healthy with steady revenue and EBITDA margin, positive cash flow and significant investments for future growth.
| $millions | 2012 | 2011 | 2010 | 2009 | 1Q13 | 1Q12 |
|---|---|---|---|---|---|---|
| Revenue | 134252 | 136264 | 128954 | 116283 | 35810 | 32445 |
| Growth in revenue | -1% | 6% | 11% | 225% | 10% | |
| EBITDA | 16752 | 17368 | 18669 | 16785 | 1774 | 1707 |
| EBITDA Margin | 12% | 13% | 14% | 14% | 5% | 5% |
| Net Income | 5665 | 20213 | 6561 | 2717 | 1611 | 1396 |
| OCF | 9045 | 9784 | 11477 | 15477 | 211 | 2075 |
| Capital expenditure | 5488 | 4293 | 4092 | 4059 | 1483 | 1093 |
| FCF | 3557 | 5491 | 7385 | 11418 | -1272 | 982 |
| Debt | 109258 | 99531 | 104019 | 131673 | 107356 | 105058 |
| Equity | 15947 | 15028 | -673 | 7820 | 17638 | 15989 |
Key investment positives
Innovation leader
Ford Motor Company (NYSE:F) has been issued 661 U.S utility patents in fiscal 2012 as compared to 444 in 2011. This increase in the number of patents is an indication of continued technological innovation, which will boost growth in the future. An important innovation to mention here is the set up of Changan Ford Engine Plant (CAFEP) which would raise engine production capacity by 400,000 units per year. Besides this, there are number of other innovations in the company’s kitty, which qualifies it to succeed in changing environment and satisfy the need of the investor.
Changing geographical mix
The company is focusing on high-growth countries like China, Russia, and Turkey, where the company expects to exceed overall industry growth.
An estimated increase in sales from 15% to 32% in the Asia Pacific and African regions is primarily because of increasing demand in China coming from rising incomes, a growing middle class and supportive industrial policies from the Chinese government. Moreover, the growth potential is expected to be high since per-capita car ownership is still low at 4.8%.
Ford Motor Company (NYSE:F)’s focus on changing the geographical mix and focusing on the Asia Pacific region is evident by the setup of Changan Ford Engine Plant (CAEFP) in China, which would more than double China’s engine production capacity. In line with the strategy of changing its geographical sales and production volumes, the company plans to close two U.K facilities in 2013. This will reduce vehicle assembly by 18%, leading to gross annual savings ranging between $450 million to $500 million.
Attractive valuations
Ford Motor Company (NYSE:F) can very well be classified as an undervalued stock. Currently, the stock is trading at just 10.7 times 2012 earnings. Further, given the expected growth, Ford is trading at 9 times 2014 and 8 times 2015 earnings. Analyst estimates shows growth of 20% and 19.2% for 2014 and 2015, respectively. The forecast PEG of the stock is therefore 0.53 for 2014 and 0.55 for 2015. A low PEG shows that the stock is undervalued considering the growth potential. Ford’s dividend history is also impressive and the stock offers a dividend yield of 2.7%.
Peer comparison
PACCAR Inc (NASDAQ:PCAR) is currently trading at 18.8 times 2012 earnings. However, an estimated growth of around 15% could be hampered with the increase in the number of truck cancellations in North America. This can negatively impact growth in fiscal 2014 resulting in the lowering of earnings estimates. Valuation will therefore adjust accordingly on the downside. The forecast PEG for PACCAR Inc (NASDAQ:PCAR) is 1.25, which is also high compared to Ford.
Tesla Motors Inc (NASDAQ:TSLA), which can be considered as another competitor, is running in losses for the last five years. The company’s earnings estimates are robust for the coming years. However, it still remains to be seen if earnings can translate into sustained profits and positive operating cash flows.
In addition to the poor financial performance, Tesla Motors Inc (NASDAQ:TSLA) has added one more rotten egg to its basket with the recall of 1,228 units of 2013 Model S cars due to defect in mounting brackets for the rear seat. Another threat for the company is a bill introduced in New York to prevent car manufacturers from selling to the customers directly. If this bill is passed, then the operating model on which Tesla Motors Inc (NASDAQ:TSLA) works would make purchasing impossible in third-most-populous state.
Conclusion
Though Ford Motor Company (NYSE:F)’s revenue and earnings growth might not have been robust, attractive valuations, a good dividend history and high growth prospects qualify the company as a good buy. A 48% increase in the number of patents justifies the innovation capabilities of the company and its strong position in this industry. Ford can be considered with a long-term investment horizon, considering the positive investment triggers and the current undervaluation.
The article Can Ford Continue to Create Shareholder Value? originally appeared on Fool.com and is written by Anjum Khan.
Anjum Khan has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, Paccar, and Tesla Motors. The Motley Fool owns shares of Ford, Paccar, and Tesla Motors. Anjum is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
